💥12 Days of B&W Finance - Day 9💥
Ladies and gentlemen, welcome to tonight’s holiday season finance bout to remember!
In the blue corner, we have the undisputed essential hero to everyone with a loan – REDRAW!
In the red corner, we have the unsung underdog taking the financial world by storm – OFFSET!
Who will come out on top? How do the two stack up against each other? Who’s name will the crowd be chanting by the end of the night?
Find out all this and more on redraw vs offset in tonight’s day 9 of our 12 days of Black and White Finaaaaaaaance!
"On the ninth day of Christmas, Black and White Finance gave to me: Nine ways to save,
- Eight specialist loans,
- Seven tips for auction,
- Six low deposits,
- Five lenders lending,
- Four guarantors,
- Three construction loans,
- Two different rate options,
- And a head start on my first home"
Round 1: Redraw
“As we get into the first round, why don’t you tell us a little about Redraw’s background, Bob?”
Redraw is truly a facility of the people, it allows you access to any excess payments you’ve made on your loan and a real life-saver if you find yourself needing some extra cash.
Redrawing money is actually quite simple, let’s say your repayments are $1,800 per month, once you’ve gotten into the rhythm of making your regular payments you now decide to put a little extra on top. You begin making monthly payments of $2,000 and after 12 months have deposited an extra $2,400 in total, this money is readily available due to your redraw facility and can be used for anything you like similar to cash.
Redraw facilities are also sometimes more favourable than normal savings accounts because rather than earning interest on your savings, you’ll be reducing interest on your home loan – a potentially better strategy in the long run!
Redraw also lets you avoid those nasty package fees that typically come with loans that feature offset accounts. These annual fees can cost anywhere from $199 to the tune of $395 depending on the lender.
A way to bypass this is to set up a transaction account and throw all your surplus cash into redraw. If you ever need the cash, you can just complete an online internal transfer from redraw to your transaction account and go from there. Sometimes this can get messy and can be a bit of a mission – especially where investment loans are involved!
Round 2: Offset
“Looks like redraw got some good hits in, Bob, but it seems offset is holding his own just fine, what’s his story?”
Unlike redraw facilities, offsets are actual bank accounts that allow borrowers to reduce the interest charges they have on their total loans.
When you are putting money into your offset account, every dollar you add is discounted from your total loan interest charges.
For example, if your home loan was for $500,000 and you deposit $20,000 to your offset, you would then only be charged interest on $480,000 for the duration that your money stays in the offset account.
Another advantage of offset accounts is that any interest added won’t be taxed, this is because it will technically not be considered as ‘income’ and allows borrowers more flexibility with their funds – a true underdog in this match up.
Finally, offsets let you keep all the transactions that you make personally separate to your home loan. So if you have an offset linked to an investment property, the full interest charge that you have for the year is typically all claimed as a deduction.
For this reason, offsets are typically recommended for investment property loans as opposed to having an investment home loan that only features redraw.
Final Round: Tiebreaker!
“Amazing! Both contenders are really giving it their all, it’s going to come down to the wire, let’s see what the key differences are between the two!”
Redraws are facilities attached to your loan allowing you to drawback additional repayments.
However, redraw facilities aren’t as flexible as their offset counterparts, some of the lenders set a minimum redraw amount and you won’t be able to redraw money from an ATM as it is part of your loan – to get around this you must transfer from your redraw to your transaction account.
Offset accounts are their own separate deposit accounts and reduce your interest repayments on your loan.
Offset accounts have the advantage of being able to be used as an everyday spending account and can even have a salary paid into them to maximise total savings, however, are not offered on all loans.
“I don’t believe what I’m seeing, Bob! It’s a double knockout, both contenders had some serious strong points about them – we’ll have to leave it to the crowd to decide who they think comes out on top!”
Final Thoughts
Some people tend to disagree about a lot of things; the best area to purchase property in, which companies to invest in stocks, whether or not ‘Die Hard’ is a Christmas movie or an action flick, etc.
Hopefully this blog has cleared up the differences between redraw and offset for you as they both have their own advantages and disadvantages. One thing to note, however, is that many people use both in conjunction with one another and are by no means limited to only having one.
Having both can actually lead to paying off your loan a lot sooner, although at the cost of different tax implications depending on how you utilise them.
It’s always a good idea to speak to a trusted financial broker who can guide you with the best way forward in a step by step manner, it may even end up saving you thousands!
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